ERISA requires that 401(k) assets are held in trust, separate from the employer or any service provider's business assets. This means that in the event of bankruptcy, the funds are not part of the employer or service provider's bankruptcy estate and are not subject to claims from the employer's creditors.
As a part of our service offering, you (the Plan Sponsor) have appointed Inspira Financial Trust, LLC (“Inspira Financial”) as the non-discretionary trustee of your 401(k) plan assets. Betterment is authorized to transact on behalf of plan assets by delegation from the Plan Sponsor under our Betterment services agreements.
Neither a trustee nor a custodian has beneficial ownership of the plan assets. Instead, plan assets are treated as if owned by the plan participants and must be used for the exclusive benefit of the plan. This also protects participant assets held in the trust from creditors. In the event of a bankruptcy, creditors of an insolvent custodian, trustee, or other service provider (such as any broker, investment manager, or adviser) have no recourse against assets of the Plan’s trust, which is regarded as a separate legal entity, and there would be no legal effect on the trust.
Betterment maintains all plan assets in accounts held by Betterment Securities, its affiliated broker-dealer, which are held in trust with Inspira Financial. Betterment Securities is an SEC registered broker-dealer and member of FINRA and SIPC. Betterment Securities maintains records of the amount and location of securities positions for each participant, so that at any time, Betterment Securities knows the securities each participant owns, and reports this information to Inspira Financial. In the unlikely event that Betterment were to fail, securities identified as belonging to the Plan would be retained in the trust at Inspira Financial Trust.
The Plan and participants have additional protection because accounts at Betterment Securities are covered by SIPC. SIPC provides coverage for missing assets when a brokerage firm fails, and not to losses due to market volatility. In the vast majority of cases where a brokerage firm fails, no customer securities are missing. Only in the event that customer investments cannot be located and returned to them in the course of winding down a brokerage that has failed, SIPC coverage will apply up to its payout limits, up to $500,000 for missing securities and up to $250,000 for cash claims. This happens very rarely because brokers are subject to stringent rules in how they custody customer assets that are designed to ensure that they do not misplace, misappropriate, or commingle customer assets. The SEC and FINRA routinely examine brokerage firms, like Betterment Securities, for compliance with these rules.
Other sources of recovery include ERISA fidelity bonds which, by law, must cover every person that handles plan funds, such as Betterment, Inspira and your employer, and that protect the plan against loss by reason of the fraud or dishonesty of such persons.
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